Sep 2009
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Honest Tea: From Mission in a Mutual Fund to Mission in a Bottle
Surprisingly enough, Honest Tea is not the first beverage company to have a strong connection to the socially responsible investment industry. After Sophia Collier and her co-founder, Connie Best, sold Soho Soda-a line of natural, caffeine-free drinks-to Seagrams in 1989, Sophia took over and grew Citizens Funds, which recently sold to Sentinel Funds.

Sophia's transition from soda to securities may not have seemed like the most logical progression, but then again, neither was my move from running marketing and sales for Calvert's Social Investment Funds to launching Honest Tea. And yet, both Calvert and Honest Tea provide a way for customers to better connect their personal beliefs to the way they live. By choosing organic ingredients, Honest Tea screens out artificial ingredients and synthetic chemicals like the herbicide atrazine (commonly used in non-organic tea cultivation), which has been associated with mutations in frogs. By selecting Fair Trade ingredients, we are engaged in our own form of community investing, as the proceeds from our purchases help fund micro-enterprise loans and other local projects in India, China and South Africa.

But it would be a stretch to claim that those parallels qualified me to launch a beverage company. My only real prior industry experience, aside from running a lemonade stand when I was nine, was that I drank beverages. I recall my trepidation that afternoon in January 1998 when I went to tell Calvert President Barbara Krumsiek that I was leaving to launch Honest Tea. Although my wife and I had just had our third son, I was taking myself out of a promising position in a world-class company to launch an unproven brand in a business I knew nothing about, let alone in an industry characterized by cutthroat competition and shady characters. In the hopes of steeling my resolve, I called my co-founder, Professor Barry Nalebuff of the Yale School of Management, and said, "OK, I'm about to resign from a job I love to launch this beverage company even though we've never actually made the tea before. Are you sure we'll actually be able to produce the drinks?" There was a long pause on the line, and then finally Barry said, "I bet if you asked to go on sabbatical, Calvert would be willing to consider that." Not exactly the inspiration I was looking for.

But Barry and I knew there was something missing in the beverage industry. All the bottled teas on the market had 80-120 calories per 8 ounce serving and we were thirsty for healthier choices. We guessed that if we were missing that kind of drink other people were too.

We also learned a few things about tea that made it the perfect ingredient for an "honest" brand:

Five Thermoses and an Empty Snapple Bottle

We started with barely sweetened drinks that contained organic sugar. (We switched from "barely sweetened" to "lightly sweetened" after one of our distributors put the words "barley sweetened" on his truck!) In the early days, selling a beverage with 17 calories per 8 ounce serving (as opposed to 80-100) made enough difference that we were welcomed into the natural foods marketplace. I managed to get an appointment with the buyer for the 17 Fresh Fields/Whole Foods stores in the Mid-Atlantic, just a few miles up the road from Calvert's headquarters, and made my first sale with five thermoses and an empty Snapple bottle with a mocked-up Honest Tea label.

As we grew, we learned that lots of people don't trust beverage companies - not too different from the feelings many social investors have about corporate America. Here's an email we received from one of our customers during our first year of business:

I was THRILLED beyond belief when I found your product at a service area in Connecticut. I am so tired of being forced to buy XXXX or XXXX, products with cute names but no nutritional value whatsoever, and worse, products with high fructose corn syrup! How are they different from soda? So I see your product, the label attracted me; the name intrigued me; so skeptically I read the label and oh my God! A real live "honest" product that is what it says and has honey instead of corn syrup.
- Elizabeth L., NY

Maybe it wasn't such a big leap from providing consumers with alternative investment options to alternative beverage options after all. In fact, a few years ago we received a voicemail from a consumer who encouraged us to get into the financial services industry:

"Good morning, my name is Kiki. I'm calling from Kalamazoo, Michigan. I have been drinking your tea for about 6 months now . . . I actually have been ordering it by the case and cases because I love this tea . . . I started to read your website last night and I thought, oh my gosh, I would beg to work at this company. I would move so I could work for your company . . . How responsible are you? That is just so . . . everything! I wish you did everything; I wish you did my banking; I wish you were my neighbors. Just, thank you so much. "

Given the importance our consumers place on our mission, it's not surprising that an important part of Honest Tea's growth has been our partnerships with Green America, City Year, Transfair, Sierra Club and other organizations that empower citizens to act upon their concerns. We even helped create our own local non-profit, Bethesda Green (http://www.bethesdagreen.org ), a local model of sustainability, and we're delighted that Calvert has joined us as a founding sponsor.

And it's been gratifying for me to rejoin my friends and mentors at Calvert as a board member of the Calvert Foundation (http://www.calvertfoundation.org ). I participated in the early brainstorming sessions before the Foundation was created, so it's exciting to see what started as an idea in 1995 become a powerful vehicle for directing capital toward community empowerment and economic development.

Since we're on the topic of social investing, it's worth noting that as an entrepreneur the process of raising investment capital was extremely challenging. There was a lot of private equity being raised in 1999-2001 but most of it was directed toward dot.com's. Even though Honest Tea had a product everyone could understand, it seemed that investors were more interested in technology they couldn't understand. The world of socially responsible angel investors was particularly disappointing for me, particularly with respect to Investors' Circle, where I presented twice but raised very little. Of course every investor is entitled to his or her opinion, but it's worth noting that if any of the Investors' Circle participants I presented to in 2000 and 2001 had invested in Honest Tea, they would have realized a return of at least ten times their money. While Investors' Circle failed to play a constructive role in Honest Tea's growth, other entities such as Net Impact and Social Venture Network were crucial. I met two of my primary board members, Jeff Swartz of Timberland and Gary Hirshberg of Stonyfield Farm (who continues to serve on Honest Tea's board) through those organizations.

Reading the Tea Leaves

As I write this article, we are halfway through the three-year call period with Coca-Cola, meaning Coke could own Honest Tea in 2011. Skeptics have argued that our brand, which set out to change the beverage industry, has been co-opted by the world's largest beverage company. But I would argue the opposite-we are having a major impact on the beverage industry. Before we launched our Honest Kids line, which have 40 calories per pouch, the average calorie profile for kids' drinks was 100 calories per pouch. Today the typical kids pouch drink has 75 calories. Although we were the first to launch organic bottled tea back in 1999, there are now dozens of brands of organic bottled tea on the market, many of which have copied our success with lower calorie formulations. We are also educating the entire Coca-Cola organization about organics (several of their bottling plants have had to gain organic certification in order to produce our product), Fair Trade and our other sustainability initiatives. In addition, Coke's distribution power has fueled our brand's expansion, enabling us to reach new stores and consumers, including school systems.

Coke has also been generous in sharing their capabilities with us. Earlier this year we introduced a bottle that is 22 percent lighter than our previous PET bottle, which will help conserve close to a million pounds of PET resin. We look forward to working with Coke on the introduction of a plant-based PET bottle some time next year.

When we negotiated the deal with Coca-Cola, we did our best to learn from the pioneers of socially responsible business to create a structure that protects the spirit and mission of the brand we created. (For a more complete discussion of these issues, visit http://www.trusteeship.org ) Big companies have a track record of draining the life out of entrepreneurial brands but so far Coke has given my team a great deal of autonomy-we continue to have our own board and there are no Coke employees in our office. In fact, I've only been down to Atlanta a few times since the deal was cut. We continue to innovate-earlier this year we launched our own line of yerba mate© drinks, Honest Mate©, and later this year we will be launching Honest Kombucha. In the long run, of course, there are no guarantees that Coke will protect and respect the brand we have built. That's one reason we have been working so aggressively to make our brand as powerful as we can while we still control it-the more Honest Tea is established as a national brand committed to organics, healthier and authentic drinks, the more likely Coke will be to leave the brand alone-after all these are the folks who learned the world doesn't want New Coke. And if they don't leave Honest Tea alone, I've been thinking there may be some good opportunities in the world of social investing.